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The state attaches great importance to the development of science and technology, and promotes the independence and controllability of hard science and technology

On October 18, General Secretary Xi Jinping visited Anhui for investigation and research and delivered an important speech, which pointed out the direction of progress and provided fundamental guidance for striving to write a chapter of Chinese-style modernization in Anhui. General Secretary Xi Jinping pointed out that to promote Chinese-style modernization, science and technology must take the lead, and scientific and technological innovation is the only way. New and high technology cannot be won or wanted, and we must speed up the realization of high-level scientific and technological self-reliance and self-reliance. Scientific research workers are the backbone of promoting Chinese-style modernization, and they must show the momentum of "how many times can we fight in life", let go of their hands and feet to innovate and create, and dedicate their talents and wisdom to the construction of a scientific and technological power, and write a wonderful chapter.

The semiconductor industry ushered in a recovery, and the sanctions imposed by the United States, Japan and the Netherlands promoted domestic independence and control

In 2024, the semiconductor industry will gradually enter the upward phase of the cycle, and the industry is expected to usher in faster growth in 2024. According to SEMI's forecast, the global semiconductor equipment industry market size in 2024/2025 will be $98.3/112.8 billion, +3%/+15% year-on-year. From the perspective of the global distribution of the industrial chain, China's share in the upstream supply side and midstream IC design end such as semiconductor equipment, materials and EDA&IP is small, and there is a risk of "stuck neck". It has formed a certain scale in wafer manufacturing and packaging and testing, and continues to develop. Since the issuance of BIS regulations in United States in 2022, the need for independent controllability has become more and more urgent, and the awareness of making up for shortcomings has increased significantly.

The

risk of "stuck" in the upstream supply chain is high, and domestic substitution is accelerating

China started late in the semiconductor industry, and upstream supply chain links such as equipment, materials and EDA&IP have long relied on imports from Europe, the United States and Japan. Domestic substitution has the problems of high technical difficulty and difficult supply chain entry. In recent years, great breakthroughs have been made in the technical side of domestic equipment, materials and EDA&IP, and the most significant progress is in equipment. Under the joint sanctions of the United States, Japan and the Netherlands, the awareness of localization of domestic wafer factories has increased, and the willingness to purchase domestic equipment and materials has increased. In the future, the above links will fully benefit from domestic substitution.

Investment advice

We believe that the investment directions worth paying attention to include computing power chips, advanced manufacturing processes and breakthroughs in bottlenecks. It is recommended to pay attention to: 1) chips: Cambrian-U, Haiguang Information, etc.; 2) Wafer manufacturing: SMIC, etc.; 3) Semiconductor equipment: North Huachuang, China Micro Corporation, Tuojing Technology, Xinyuan Micro, etc.; 4) Semiconductor materials: Tongcheng New Materials, Huate Gas, Hanbell Precision Machinery, etc.; 5) EDA and IP design: Empyrean, VeriSilicon, etc.; 6) Advanced packaging and storage: GigaDevice, Tongfu Microelectronics, etc.

Risk Warning

The risk that the recovery of the semiconductor industry is less than expected, the risk that the expansion of domestic wafer factories is less than expected, the risk of domestic substitution is less than expected, and the risk of intensifying international trade frictions and conflicts.

First, the state vigorously supports the science and technology industry, and the semiconductor industry ushers in opportunities

In April 2024, the State Council issued the "Several Opinions on Strengthening Supervision and Preventing Risks and Promoting the High-quality Development of the Capital Market" (the opinions are divided into nine parts, referred to as the "National Nine Articles"). The eighth part is about "further deepening reform and opening up in an all-round way and better serving high-quality development", which proposes to focus on five major articles: science and technology finance, green finance, inclusive finance, pension finance, and digital finance. Promote the deepening and implementation of the stock issuance registration system, enhance the competitiveness of the capital market system, enhance the inclusiveness of new industries, new forms of business and new technologies, and better serve the implementation of national strategies such as scientific and technological innovation, green development, and the reform of state-owned assets and state-owned enterprises, as well as the development and growth of small and medium-sized enterprises and private enterprises, and promote the development of new quality productive forces. Increase equity and debt financing support for enterprises that are in line with the national industrial policy orientation and make breakthroughs in key core technologies. Intensify the reform of mergers and acquisitions, and take multiple measures to activate the mergers and acquisitions market. Improve the sustainability information disclosure system of listed companies.

Improve the multi-level capital market system. Adhere to the dislocation development of the main board, the science and technology innovation board, the growth enterprise board and the Beijing Stock Exchange, deepen the reform of the new third board, and promote the standardized development of regional equity markets. We will further smooth the cycle of "fundraising, investment, management and withdrawal", and give full play to the role of venture capital and private equity investment in supporting scientific and technological innovation.

This opinion maintains strong support for the development of the technology industry, and strengthens the reform of mergers and acquisitions. Looking back at the semiconductor industry powerhouses such as the United States and Japan, mergers and acquisitions are important means for the growth and development of companies in the industry. At present, the domestic semiconductor industry is still in the early stage of development, there are many start-ups, and companies in equipment, materials and other subdivisions are scattered.

In September 2024, the China Securities Regulatory Commission issued the "Opinions on Deepening the Market Reform of Mergers and Acquisitions of Listed Companies", which proposes to support the transformation and upgrading of listed companies in the direction of new productivity, encourage listed companies to strengthen industrial integration and further increase support for mergers and acquisitions, which is important for the development of the domestic semiconductor industry.

Table 1: The China Securities Regulatory Commission issued the Opinions on Deepening the Market Reform of M&A and Restructuring of Listed Companies

direction

content

support the transformation and upgrading of listed companies to the direction of new quality productivity

China Securities Regulatory Commission will actively support listed companies to carry out mergers and acquisitions around strategic emerging industries and future industries, including cross-industry mergers and acquisitions based on transformation and upgrading, the acquisition of unprofitable assets that help to strengthen the chain and improve the level of key technologies, and support the mergers and acquisitions of upstream and downstream assets of the industrial chain by companies in the "two innovations" sector, etc., to guide more resource elements to gather in the direction of new quality productivity.

encourage listed companies to strengthen industrial integration

capital market will continue to help traditional industries reasonably improve industrial concentration and improve resource allocation efficiency through restructuring. The need for integration between listed companies will be supported by improving the provisions on the restricted sale period and greatly simplifying the review process. At the same time, private investment funds are encouraged to actively participate in mergers and acquisitions through arrangements such as "reverse linkage" during the lock-up period<

further enhance regulatory inclusiveness

The CSRC will, while respecting the rules, respect the laws of the market, respect the laws of the economy, and respect the laws of innovation, and further enhance the inclusiveness of matters such as restructuring valuation, performance commitments, intra-industry competition, and related party transactions. Better play the role of the market in optimizing resource allocation

improve the efficiency of restructuring market transactions

China Securities Regulatory Commission will support listed companies to issue payment instruments such as shares and convertible bonds in installments, pay transaction consideration in installments, and provide supporting financing in installments according to the transaction arrangement, so as to improve transaction flexibility and efficiency in the use of funds. At the same time, a simplified review procedure for restructuring will be established to greatly simplify the review process, shorten the review time limit, and improve the efficiency of restructuring for the restructuring of qualified listed companies

improve the service level of intermediaries

active M&A and restructuring market is inseparable from the function of intermediaries. The China Securities Regulatory Commission will guide securities companies and other institutions to improve their service capabilities, give full play to the role of transaction matching and professional services, and help listed companies implement high-quality mergers and acquisitions

strengthen supervision in accordance with the law

The CSRC will guide all parties to the transaction to standardize the implementation of mergers and acquisitions and restructuring activities, strictly fulfill various legal obligations such as information disclosure, crack down on all kinds of violations of laws and regulations, and effectively maintain the order of the restructuring market, effectively and effectively protect the legitimate rights and interests of small and medium-sized investors

Source: official website of the China Securities Regulatory Commission, Yuanda Information Securities Research Institute

In the first three quarters of 2024, ASML achieved revenue of 148.820 billion yuan, a year-on-year decrease of 6.50%; net profit was 38.209 billion yuan, down 15.76% year-on-year. According to ASML's announcement, orders for the third quarter of 2024 were 2.63 billion euros, lower than market expectations of 5.39 billion euros, due to a sharp decline in Chinese orders in the third quarter due to the ban on lithography machines, while Chinese orders accounted for 49% in the second quarter. We believe that under the ban on lithography machines, domestic wafer factories have accelerated the procurement of lithography machines and are ready for subsequent expansion, which has laid a solid foundation for subsequent large-scale expansion, and is expected to increase support for the domestic supply chain, which is conducive to the development of the domestic semiconductor manufacturing industry chain.

Figure 1: ASML's revenue in the first three quarters of 2024 fell 6.50% year-on-year

Figure 2: ASML's net profit in the first three quarters of 2024 fell 15.76% year-on-year

Source: Wind, Yuanda Information Securities Research Institute

Source: Wind, Yuanda Information Securities Research Institute

In the first three quarters of 2024, TSMC achieved revenue of 449.535 billion yuan, a year-on-year increase of 31.87%; The net profit was 177.207 billion yuan, a year-on-year increase of 33.15%, and the performance maintained rapid growth, exceeding market expectations, which is due to the fact that the demand for computing chips in the artificial intelligence industry remains sufficient, and highlights that the semiconductor industry is in the stage of cyclical recovery. The domestic semiconductor industry is expected to seize the opportunity and fully benefit from the dual promotion of cycle recovery and domestic substitution.

Figure 3: TSMC's revenue in the first three quarters of 2024 increased by 31.87% year-on-year

Figure 4: TSMC's net profit in the first three quarters of 2024 increased by 33.15% year-on-year

Source: Wind, Yuanda Information Securities Research Institute

Source: Wind, Yuanda Information Securities Research Institute

Second, the semiconductor industry is ushering in a recovery, and independent and controllable is imminent

The sales revenue of the global semiconductor industry will rebound in 2024. According to SIA data, the sales revenue of the global semiconductor industry in 2022 will be 574 billion US dollars, a year-on-year increase of 3.20%. According to the WSTS forecast quoted by SIA, the sales revenue of the global semiconductor industry in 2023 will be 515 billion US dollars, a year-on-year decrease of 10.0%, due to the weak demand for consumer electronics and the excess inventory of chip manufacturers. In 2024, sales revenue is expected to rebound under the combined effect of industry inventory clearance and demand from AI data centers, automotive electronics and other industries. From the perspective of downstream semiconductor device sales revenue in 2022, logic, memory and analog chips are the top three products, with a total market share of 69%.

Figure 5: Global semiconductor device sales revenue by type in 2022 (US$ 100 million)

Figure 6: Global semiconductor industry sales revenue (US$ 100 million)

Source: SIA, WSTS, Yuanda Information Securities Research Institute

Source: SIA, WSTS, Yuanda Information Securities Research Institute

The upstream and downstream of the semiconductor industry are closely linked, and all links are indispensable. The upstream of the semiconductor industry chain includes EDA software, IP commissioned and outsourced design services, manufacturing equipment and materials; Midstream includes integrated circuit design, wafer fabrication, and packaging and test; The downstream is terminal system manufacturers, and the main application industries include mobile communications, data centers, automotive electronics, computers and industrial applications.

Figure 7: Semiconductor industry chain

Source: VeriSilicon prospectus, Yuanda Information Securities Research Institute

Semiconductor devices can be divided into four categories according to international general product standards: integrated circuits, discrete devices, sensors and optoelectronic devices. Integrated circuits can be divided into digital chips and analog chips according to the processing signals, among which digital chips are divided into memory chips, logic chips and microcontroller MCUs according to their functions. Discrete devices are mainly power devices, including IGBTs, MOSFETs, diodes, thyristors and other products.

Figure 8: Classification of semiconductor devices

Source: Optocoupler, Yuanda Information Securities Research Institute

According to the business model, the midstream enterprises in the semiconductor industry chain can be divided into vertical integration model (IDM), wafer foundry model (Foundry) and fabless model (Fabless). In the early days, the industry was dominated by the IDM model, and at present, according to the characteristics of chips, the industry business model is differentiated

Logic chips: In the early days, Intel, AMD and other companies were IDM models, while TSMC carried forward the foundry model. The main system is (1) the logic chip develops according to Moore's law, and the process node iteration is fast; (2) There are various types of logic chips, and the downstream demand is fragmented, which makes it difficult to give full play to the scale effect of wafer manufacturing; (3) The technical barriers of logic IC design and wafer manufacturing are different, and the division of labor model achieves a win-win situation for both parties.

Memory chips: Samsung, Hynix and other storage giants are all IDM models, mainly due to (1) the iteration speed of storage products is slow, the product convergence is high, and the scale effect is obvious; (2) Memory chips have a certain commodity nature, and the downstream demand changes greatly, so the IDM model can expand and reduce production more flexibly. (3) Some domestic storage manufacturers, such as GigaDevice, are currently in the fabless model, which has a small share of domestic storage and has no significant scale effect.

Power devices: Infineon and other international giants are IDM mode, domestic IDM and fabless mode are parallel, mainly due to (1) the core barrier of power devices lies in the characteristic manufacturing process, and the foundry mode has the risk of technology leakage; (2) The iteration speed of power device products is slow; (3) The reason for the parallel of domestic IDM and fabless mode is that domestic power devices are in the early stage of development at the characteristic process end, with a small market share, and it is difficult to give full play to the scale effect of the IDM model.

Table 2: Different business models of midstream enterprises in the semiconductor industry chain

type

mode

Vertical Integration Model (IDM)

covers chip design, wafer manufacturing, packaging and testing, and subsequent product sales

foundry model<

does not cover chip design, but is responsible for wafer fabrication and provides foundry services for chip product companies

fabless<

does not cover wafer manufacturing and packaging and testing, but is responsible for chip design and subsequent product sales, and outsources wafer manufacturing and packaging and testing to professional wafer manufacturing, packaging and testing enterprises

Source: Huahong Company Prospectus, Yuanda Information Securities Research Institute

The self-sufficiency rate of the domestic semiconductor industry chain is low. From the perspective of the regional proportion of the global semiconductor industry chain, United States, Europe and other countries and regions have a majority share, and the domestic wafer manufacturing and packaging testing in the middle of the industrial chain only occupy a certain proportion. However, in the upstream supply chain links such as EDA&IP, equipment, and high-end manufacturing materials, it is still unable to meet self-sufficiency, and there is a situation of "being controlled by others".

The United States, Japan and the Netherlands jointly issued export control regulations against China, with the strongest sanctions on equipment and chips. Since the United States Department of Commerce announced the BIS regulations on October 7, 2022, the United States, Japan and the Netherlands have successively issued export control measures to China, mainly restricting the weak domestic advanced process chips and related manufacturing equipment. Upstream equipment, manufacturing materials and EDA&IP, which have the risk of "stuck" fields, are the basis of chip manufacturing, and China still relies on imports from the United States, Japan and the Netherlands. In the current international environment, the above fields have become high-risk links in the supply chain, and domestic substitution is becoming more and more urgent.

Table 3: The United States, Japan and the Netherlands have jointly imposed export controls on China, with the device and chip side being the most powerful

date

event

2022/10/7

United States Ministry of Commerce added 31 Chinese companies to the "unverified list" to the "unverified list". Export control of DRAM chips, manufacturing equipment and components of 18nm and below

2022/12/15

United States Ministry of Commerce has decided to add 36 Chinese entities, including Changcun, Cambrian, ICRD, Shanghai Microelectronics and Pengxin Microelectronics, to the Entity List

2023/1/27

the United States, Japan and the Netherlands reached an agreement on export restrictions on China's advanced equipment, which are consistent with the new BIS regulations on October 7

2023/3/8

ASML issued a "Statement on Additional Export Controls" on its official website, setting the limit of lithography machines to high-end immersion models
after 2000i

2023/3/31

Japan government announced that 23 types of advanced process semiconductor equipment will be added as export control objects, and the restrictions will take effect in July<

2023/6/30

Netherlands issued new export control rules to restrict the export of ASML's TWINSCAN NXT:2000i and subsequent immersion lithography machines to China, and the controls will take effect on September 1

2023/7/23

Japan government announced that the export control measures for 23 categories of advanced process semiconductor equipment

Sources: Semiconductor Industry Observation, Electronic Innovation Network, Electronic Enthusiast Network, Tiger Sniff, China Industry Network, Yuanda Information Securities Research Institute

3. Upstream supply chain: domestic weak links, "stuck" risk

1. Semiconductor equipment

Global semiconductor equipment sales are expected to accelerate in 2025. According to the "Mid-Year Total Semiconductor Equipment Forecast Report" released by SEMI in July 2024, the global fab equipment expenditure will increase from US$95.6 billion in 2023 to US$98.3 billion in 2024, a year-on-year increase of 3%, mainly due to the gradual improvement of the industry and entering the upward phase of the cycle. Looking ahead to 2025, the demand for high-performance chips in industries such as artificial intelligence will further grow, coupled with the recovery of demand in industries such as automotive, consumer electronics and industrials, global fab equipment spending is expected to grow to US$112.8 billion, a year-on-year increase of 15%.

Figure 9: Global Fab Equipment Spending is Expected to $98.3 Billion in 2024

Source: SEMI, Yuanda Information Securities Research Institute

Semiconductor equipment is a high technology threshold & high value-added industry. The main processes of front-end wafer processing include lithography, etching, and thin film deposition, which are characterized by extremely high requirements for wafer processing accuracy, usually in the tens to hundreds of nanometers. In addition, some processes need to be carried out many times, which requires high equipment capacity and efficiency. The above reasons also lead to the high price of semiconductor equipment for front-end wafer processing, and the investment in a 12-inch wafer production line with a production capacity of 10,000 pieces/month is billions of yuan.

Figure 10: The main processes corresponding to the semiconductor front-end wafer manufacturing process

Source: Xinyuan Micro Prospectus, Yuanda Information Securities Research Institute

According to AMEC's 2022 performance briefing, thin film deposition equipment, etching machines and lithography machines accounted for about 22%, 22% and 17% of the value of semiconductor equipment. According to Moore's Law, the number of transistors in a chip doubles approximately every two years. In the future, under the trend of wafer manufacturing to more advanced process nodes, the amount of investment in equipment will increase significantly. At the same time, the demand for double-template, quadruple-template and other processes in the logic chip manufacturing process increases, and the transformation of memory chips to three-dimensional structure will significantly increase the demand for thin film deposition, etching and other processes. In the future, the proportion of thin film deposition and etching value may be further increased.

2022 Global Semiconductor Equipment Value Ratio by Type

Figure 12: Equipment investment per 50,000 wafer capacity (US$ 100 million)

Source: SEMI, AMEC, Yuanda Information Securities Research Institute

Source: SMIC Prospectus, Yuanda Information Securities Research Institute

Figure 13: The double/quadruple template adds multi-pass thin film deposition and etching processes<

Figure 14: 3D memory chips add multi-pass thin film deposition and etching processes<

Source: AMEC, Yuanda Information Securities Research Institute

Source: Tuojing Technology Prospectus, Yuanda Information Securities Research Institute

The global semiconductor equipment market is monopolized by the United States, Japan and the Netherlands. The semiconductor equipment industry is a high-barrier industry, and companies such as AMAT (Applied Materials), ASML, LAM (Lam Semiconductor), TEL (Tokyo Electron), and KLA (Kelei Semiconductor) started early, and have accumulated deep technology and technology, occupying the world's major market share. In recent years, domestic manufacturers such as NAURA and AMEC Shanghai have made great breakthroughs in the fields of heat treatment, thin film deposition, etching and cleaning, and the client is progressing smoothly. The gluing development and process control equipment is a weak link in domestic equipment, and there is an urgent need to "make up for shortcomings" in the current international situation. According to the announcement of Xinyuan Micro, the company has released the third-generation immersion model that can be used for the 28nm node at the end of 2022, which is expected to usher in the large-scale stage after the "0-1 breakthrough". At present, the localization rate of lithography machine is almost zero, Shanghai Microelectronics is currently the most expected to break the monopoly of lithography machine import domestic company, the company's official website has launched the lithography accuracy in 90nm ArF lithography machine, and is carrying out the research and development of 28nm immersion lithography machine.

Table 4: Overall, the localization rate of semiconductor equipment is still at a low level

device type

major foreign manufacturers

major domestic manufacturers

localization rate

PVD

applied materials (United States)

NAURA

>20%

CVD

Applied Materials(United States), Lam Research (United States), TEL(Japan)

North Huachuang, Tuojing Technology

ALD

TEL(Japan)、Applied(United States)

NAURA Innovation, Tuojing Technology, Microconductive Nano

etching

Lam Research(United States), TEL(Japan), Applied United States<

AMEC, NAURA and Yitang Semiconductor

>20%

lithography

ASML (Denmark), Nikon (Japan), Canon (Japan)

Shanghai Microelectronics

20%

wash

DNS(Japan), TEL(Japan), Lam Research(United States)

Shengmei Shanghai, North Huachuang, Zhichun Technology, Xinyuan Micro

>50%

CMP

applied materials(United States)、TYK(Japan)

Huahai Qingke

>30%

ion implantation

applied materials (United States), Axcell (United States),

Wanye Enterprise (Kaishitong)